Gildan Activewear is a supplier of basic family apparel including T-shirts, fleece, sport shirts, underwear and socks. Management owns 11 per cent of the shares, so its interests are very much aligned with yours. This manufacturing stock is a buy for long-term share price gains and modest, but growing, dividends.

Gildan has agreed to pay cash of $66 million (all figures in U.S. dollars unless preceded by a C). It can easily afford this. On September 30, Gildan held cash of $60.4 million. In addition, its net debt-to-cash-flow ratio was a safe and low 1.3 times.

Gildan will also buy inventory from American Apparel. This is to ensure that it has a supply of goods as it integrates the American Apparel brand into its Printwear division.

Acquisition’s impact won’t be felt until 2017

The acquisition looks promising. Gildan writes: “The American Apparel brand is a highly recognized brand among consumers. The American Apparel brand would represent a strong complementary addition to the Company’s portfolio of brands. The acquisition will create revenue growth opportunities by leveraging Gildan’s extensive distribution network in North American and international printwear markets to further increase the brand’s penetration in the faster growing fashion-basics segments in these markets.”

Gildan expects to close the acquisition in the first three months of 2017. As a result, it will have no beneficial impact on 2016 results.

In 2016 this apparel manufacturing stock’s earnings are expected to inch up by only 2.1 per cent, to $1.49 a share. This reflected five negative things. One was lower orders for Gildan’s Printwear inventory. A second was fewer private-label sales. A third was lower selling prices. A fourth was less traffic at department stores. A fifth was adverse currency movements.

In August, Gildan agreed to pay $55 million for hosiery company Peds Legwear. This company and Alstyle, acquired in May, are expected to have added $115 million to Gildan’s sales. Without this, its results would likely have been worse.

Manufacturing stock’s earnings expected to jump in 2017

Gildan’s earnings estimate works out to C$2.02 a share. Based on this, the shares trade at a price-to-earnings, or P/E, ratio of 17.7 times. But the forward-looking market now focuses on companies’ expected earnings next year.

In 2017, Gildan’s earnings are expected to jump by 16.8 per cent, to $1.74 a share. That’s C$2.36 a share. Based on this estimate, the shares trade at a P/E ratio of 15.2 times. That seems reasonable for a company whose earnings growth is expected to accelerate.

By our calculations, Gildan has delivered a strong five-year return of 104 per cent. That’s little surprise. With management owning 11 per cent of the shares, it’s in its best interests to make sure that the company remains successful. This, of course, works to your benefit.